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Strong overseas demand confirms Telecom Renaissance

申银万国


Industry Industry Research
TMT December 30,2010
Strong overseas demand confirms Telecom Renaissance —— 2010 December TMT strategy report
Neutral Unchanged Related Research:
Investment highlights ? Overview: Overseas demand for Chinese telecom equipment is recovering. We are bullish on the prospects of ZTE and Comba Telecom in 2011. CU is likely to achieve comfortable 3G user growth in 1Q11. Therefore we maintain our Outperform rating on CU. ? ?
“Buy China Wireless, Tencent and China Mobile in the interim-result season”-August 10,2010 "Handset sector— New opportunities arise as 3G market heats up " July 2,2010 "China Wireless (2369.HK)—Interim result preview: we expect shining interim results from China Wireless" Aug 4,2010
Recovering Chinese telecom exports. We believe that this trend will continue in 2011. When 3G user growth picks up in 2011, so will demand for network
optimization. Comba Telecom, as the leading network optimization solution provider, would benefit from this. ? ? ? 3G user growth will accelerate in 1Q11 as CU offers aggressive handset subsidies. Hot points for Dec-Jan:1) 3G user growth; 2) CU’s will offer the iPad December review: 1) We issued our in-depth report on CU asserting our view that CU’s performance in 4Q10 will be poor. CU’s revenue momentum will be very encouraging in 2011, therefore we maintain our Outperform rating and TP of HK$ 14.30. 2) We visited NVC Lighting (2222. HK) and Neo-Neon (1868.HK) to explore opportunities in the LED industry. We believe that the demand for LED will increase rapidly. NVC and Neo-Neon are well positioned to meet the increasing demand for LED products. 3) We visited AAC Acoustic. We believe that consumer electronics will enjoy strong growth in 2011. As the leading supplier of sound models, AAC Acoustic may benefit from rising demand for consumer electronics.
Jim Tang Equity Analyst tangmj@swsresearch.com
Ikon Lan Equity Analyst lankun@swsresearch.com
Contact Ashley Sheng (8621)23297818×7274 shengzw@swsresearch.com
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The company or its affiliate may have equities of the listed corporation reviewed authorized by law. The company may also provide investment banking and consulting service to the listed corporation. The Company fulfills its duty of disclosure within its sphere of knowledge. The clients may contact compliance@swsresearch.com for the relevant disclosure materials. The clients shall have a comprehensive understanding of the disclosure in the last page.
Dec 2010 Industry Comments
投资摘要: ? 综述:海外市场对中国通讯设备的需求正恢复。我们看好中兴通讯和京信 通信 2011 年的表现。2011 年一季度,中国联通 3G 用户的增长有望达到 令人满意的水平。因此,我们维持对中国联通的增持评级。 ? 中国通信设备的出口正得到不断复苏。我们认为这个增长趋势会在 2011 得到延续。 ? 当 3G 用户数的增长在 2011 年得到加速后, 网络优化的需求也会相应地增 加。作为领先的网络优化解决方案供应商,京信通信将为因此而受益。 ? 中国联通积极的手机补贴将会加速其 3G 用户数的增长。 ? 12 月- 1 月热点:1)3G 用户的增长;2)中国联通将出售 iPad ? 2010 年 12 月回顾: 1) 我们发布了中国联通的深度报告, 认为中国联通今年四季度的业绩较弱。 然而,收入增长势头在 2011 年将会非常振奋人心,因此我们维持对其增持 的评级,目标价为 14.30 港币。 2)我们拜访了雷士照明(2222.HK)和真明丽(1868.HK) ,以期挖掘 LED 行业的投资机会。我们认为,LED 产品需求在未来会有较快的增长。雷士 照明和真明丽能完全应对 LED 产品需求的增加。 3)我们拜访了瑞声声学。认为,消费电子产品需求在 2011 年会有强劲的 增长。作为声学行业的领先者,瑞声声学将受益于消费电子产品需求的增 长。
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Dec 2010 Industry Comments
Investment case Case 1: Recovering Chinese telecom exports Valuation and TP: In light of rising overseas demand and the potential demand for network optimization, we recommend ZTE (763 HK) and Comba Telecom (2342 HK). We maintain our Outperform rating on both of these stocks with target prices of HK$42.6 and HK$11.5 respectively. How we differ from consensus: The market hasn’t fully realized the improvements in overseas demand and ZTE’s earnings ability. From observing ZTE’s current valuation, we believe that the strong growth prospects and earnings ability of ZTE in 2011 have also not been fully realized by the market, yet successive financial indicators support our optimism. We therefore maintain our Outperform rating on ZTE (763 HK). As ZTE’s supplier, Comba Telecom would benefit from ZTE’s strong top-line growth in 2011. We maintain our Outperform rating on Comba Telecom, with a TP of HK$11.5. Catalyst: 1) Improved 1Q11 results;2) Increased demand for Chinese telecom exports
Case 2: CU’s 3G user growth is likely to accelerate in 1Q11 Valuation and TP: We maintain our Outperform rating on CU with a TP of HK$ 14.30. We believe that CU’s 3G business will breakeven in 2011. In light of CU’s aggressive handset subsidies, we lower our 2010-2012 EPS forecasts from RMB 0.20, 0.44 and 0.80 to RMB 0.20, 0.26 and 0.74 respectively. How we differ from the market: The market is concerned about 2011 3G growth and how CU’s aggressive subsidies could damage top-line and bottom-line growth. We believe that 3G user growth will fall short of market expectations in 2010. However, it is highly likely that 3G user growth will accelerate as operators optimize their 3G network coverage, lower 3G service fees and improve their handset ranges. We estimate that there will be 140 million 3G subscribers by the end of 2011. With the possibility of explosive growth in 3G users in 2011, we are optimistic about CU’s top-line growth. We see some short-term risks from CU’s aggressive handset subsidy policy to its bottom-line. With an increased number of 3G users, the increase in ARPU would cover the handset subsidies in the long-term. When CU delivers improved operating data for its 3G business, we estimate that the quarterly earnings of CU will be RMB 0.02, 0.05, 0.08 and 0.11. This would convince the market of the profitability of CU’s 3G business. Catalyst: 1) Acceleration of 3G subscriber growth in 1Q11; 2) Improved 1Q11, 2H11 results
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Dec 2010 Industry Comments
Table of Content Top Story: Recovery of overseas demand for Chinese telecom equipment ................................................................................................. 5 Chinese telecom exports hit bottom in October 2010........................... 5 ZTE’s Indian export revenues will double in 2011 ................................................. 6 RMB150B 3G investment in 2011 ...................................................................... 6 Comba Telecom: safe valuation and rebounding demand ...................................... 7
CU will achieve strong sales momentum in 2011.................................. 7 Aggressive handset subsidies will accelerate 3G user growth in 2011 ...................... 7 Lower 3G fees----another way to boost 3G users ................................................. 8 Impressive quarterly earnings momentum in 2011 ................................................ 9 Outperform rating for CU with a TP of HK$ 14.30 ................................................. 9
Major events ............................................................................................. 9 December review: LED to become popular in 2011............................... 9 January 2011 hot points: 3G user growth; peak season for online gaming companies................................................................................. 10 Appendix ....................................................................................................11
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Dec 2010 Industry Comments
Chart & Table Chart 1: Poor performance of telecom equipment manufacturers in 2010 .............5 Chart 2: Global telecom capex will increase by 7.4% in 2011...................................5 Chart 3: Global wireless network investments continued to improve in 2010........6 Chart 4: Telecom equipment exports bottomed out in October 2010 ......................6 Chart 5: China Mobile’s 2G utilization surged by 15% in the first half of 2010 .......7 Chart 6: Growth of handset subsidies........................................................................8 Chart 7: Low 2G ARPU implies that current 2G users might not be able to afford high 3G fees, 3G fees will continue to decrease........................................................8 Chart 8: We have factored in a decreasing 3G ARPU for the next three years .......8 Chart 9: Estimates of CU’s 3G users ..........................................................................9 Chart 10: ARPU estimates of CU’s 3G users..............................................................9 Chart 11: Telecom Industry: Operating Revenue.......................................................1 Chart 12: Telecom industry: wireline, mobile & broadband service subscribers ...1 Chart 13: Wireline business: China Telecom & China Unicom.................................1 Chart 14: Wireline broadband business: China Telecom & China Unicom .............1 Chart 15: Mobile service subscribers: China Mobile, China Telecom & China Unicom ..........................................................................................................................1 Chart 16: 3G subscribers: China Mobile, China Unicom & China Telecom.............1 Chart 17: 3G subscriber monthly additions: China Mobile & China Unicom ..........2 Chart 18: Internet users ...............................................................................................2 Chart 19: The software industry: monthly revenue ...................................................2 Chart 20: The software industry: export & growth trend ..........................................2 Chart 21: The software industry: outsourcing & growth trend.................................2 Chart 22: October 2010 Software Industry Revenue Structure ................................2 Chart 23: CATV subscribers ........................................................................................3 Chart 24: Seasonal market scale of outdoor LED advertising and growth trend ...3 Chart 25: Seasonal market scale of online advertising and growth trends ............3 Chart 26: The electronic manufacturing industry: sales revenue & delivery value of exports ......................................................................................................................3 Chart 27: The import & export of electronic products...............................................3 Chart 28: The growth trend of electronic products exports .....................................3
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Dec 2010 Industry Comments
Top Story: Recovery of overseas demand for Chinese telecom equipment Chinese telecom exports hit bottom in October 2010 2010 has been a poor year for telecom equipment manufacturers. The HSCEI decreased by 1.89% in 2010 till Dec 30. The stock prices of ZTE (763 HK) and MOBI Development (947 HK) fell 9.86% and 19.24% respectively. During this period, Comba delivered a satisfactory return of 14.49%, owing to a successful global expansion. This gloomy performance of other telecom operators is mainly put down to the Indian export ban and lagging domestic 3G investment. In late April, India announced that it would cease telecom equipment imports from China, because of security reasons. As a result of this, the stock prices of ZTE, Comba and MOBI plummeted in May-August. In August, ZTE and Huawei agreed to comply with new Indian security laws leading to a rebound in the stock prices of the three companies. Based on these events, we deduce that the stock prices of telecom equipment manufacturers are highly correlated with overseas demand for telecom equipment.
Chart 1: Poor performance of telecom equipment manufacturers in 2010
Chart 2: Global telecom capex will increase by 7.4% in 2011
Source: Bloomberg , SWS Research
Source:Analysys Mason, SWS Research
We are highly optimistic about overseas demand for telecom equipment in 2011. The core assumptions behind this forecast are rising telecom infrastructure construction in emerging markets and network upgrades in developed markets. According to Analysys Mason, global telecom capex will increase by 7.4% in 2011, higher than that of 2010. Global wireless network investments will continue to improve in 2011.
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Dec 2010 Industry Comments
Chart 3: Global wireless network investments continued to improve in 2010
Chart 4: Telecom equipment exports bottomed out in October 2010 40000 35000 30000 25000 20000 10% 15000 10000 5000 0 2008-07 2008-09 2008-11 2009-01 2009-03 2009-05 2009-07 2009-09 2009-11 2010-01 2010-03 2010-05 2010-07 2010-09 2010-11 0% -10% -20% -30% mn USD 60% 50% 40% 30% 20%
Computer and Telecom Tech Exports Computer and Telecom Tech Exports% YoY
Source:Swedbank Research , SWS Research
Source:Swedbank Research , SWS Research
The recovery in Chinese computer and telecom equipment exports bottomed in October 2010, right after ZTE and Huawei’s compromise with Indian authorities. After the Indian ban on Chinese telecom equipment imports in late April, the YoY growth rate of computer and telecom equipment exports had decreased from 47% in May to 12% in October. A rebound occurred from 12% growth YoY in October to 24% YoY growth in November after ZTE and Huawei complied with Indian safety requirements in 3Q10.
ZTE’s Indian export revenues will double in 2011 ZTE’s business faced large challenges in India in 2Q10. Since ZTE’s compliance with Indian safety standards, ZTE’s inventory has increased by 20% QoQ to RMB 13.66B in 3Q10, implying increasing orders from India. On December 8 2010, ZTE announced that they had signed a UMTS construction contract amounting to USD 85M with Aircel, a top 10 telecom operator in India. This order is a clear sign that ZTE’s Indian business is recovering fast. Before 2010, ZTE’s revenues from India were normally RMB 4-5B. In 1Q10-3Q10, ZTE’s Indian revenues were RMB 2B. We believe that ZTE’s Indian revenues are very likely to double in 2011, because of this low base.
RMB150B 3G investment in 2011 Recently, the MIIT announced that it would invest RMB 400B in the mainland telecom industry, 80% of which will be spent on 3G and broadband construction. 3G investment in 2010 definitely disappointed the market. We estimate that 2010 3G investment amounted to only ~RMB 90B. In 2011, 3G investment in China will be ~RMB 160B, ~78% higher than 2010. Domestic 3G capex will improve in 2011.
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Dec 2010 Industry Comments
In December 2010 there were various indicators that supported our belief that both domestic and overseas demand for Chinese telecom equipment would rebound in 2011. Therefore, we believe that telecom equipment manufacturers will prosper in 2011.
Comba Telecom: safe valuation and rebounding demand CM’s 2G utilization rate has been much higher since the introduction of 3G. As a result of the increasing data usage of 3G users, network quality has been compromised. The CEO of CM also acknowledged that its 2G network is under pressure and that CM will improve its network quality in 2011. 3G users are set to triple in 2011, which will place further pressure on CM’s network quality. As the leading network optimization solutions provider, Comba Telecom can take advantage of this. For Comba, we make 2010/11/12 EPS forecasts of HK$0.64, 0.83, and 1.60, respectively; with a 10x11P/E.
Chart 5: China Mobile’s 2G utilization surged by 15% in the first half of 2010
Source: Company reports, SWS Research
CU will achieve strong sales momentum in 2011 Aggressive handset subsidies will accelerate 3G user growth in 2011 In 2011, we are likely to see CU’s 3G user growth accelerate, which drive the performance of CU’s stock price. The reasons why we believe that CU’s 3G users will increase are handset-upgrading demands, lower 3G fees and CU’s aggressive subsidies. We have analyzed the demand for handset upgrades in our last monthly report. CU has taken an aggressive approach to handset subsidies since 3Q10. In 1H10, CU spent RMB 1.2B on handset subsidies. In 3Q10, RMB 1.8B was spent. In 4Q10, we estimate that CU will spend RMB 3B
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Dec 2010 Industry Comments
on handset subsidies. We believe that CU’s aggressive handset subsidies will continue in 2011, triggering strong 3G user growth.
Chart 6: Growth of handset subsidies
Source: SWS Research
Lower 3G fees----another way to boost 3G users CU has recently initiated a new monthly 3G package, priced at RMB 46 per month. This package is aimed at reducing the price barriers for consumers wishing to use 3G. Normally, the 2G APRU of mainland telecom operators is between RMB 35-60. Previously, CU’s lowest monthly 3G charge was RMB68. Lowering 3G fees is a necessary step for telcos to attract 3G users. We believe that this trend will continue. In our financial model, we expect CU’s 3G ARPU to be RMB 120.45, 102.38 and 81.9 in 2010E-2012E, respectively.
Chart 7: Low 2G ARPU implies that current 2G users might not be able to afford high 3G fees, 3G fees will continue to decrease
Chart 8: We have factored in a decreasing 3G ARPU for the next three years
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Dec 2010 Industry Comments
Source: Nielson , SWS Research
Source:Nielson, SWS Research
Impressive quarterly earnings momentum in 2011 To quantify the effect of 3G on CU’s bottom-line, we factored-in the below assumptions into our financial model. Under these assumptions, we forecast quarterly EPS in 2011 of RMB 0.02, 0.05, 0.08 and 0.12 respectively. For CU, we forecast a 2011 EPS of RMB 0.26. However, we’ll see a strong rebound of CU’s bottom-line in 2012. According to our financial model, the 2012 EPS of CU will be RMB 0.74, representing a 284% YoY growth. Chart 9: Estimates of CU’s 3G users Chart 10: ARPU estimates of CU’s 3G users
Source:SWS Research
Source:SWS Research
Outperform rating for CU with a TP of HK$ 14.30 With strong 3G user growth and the improving earnings ability of CU’s 3G business, we maintain our Outperform rating and a TP of HK$ 14.30. We also maintain our 2010E-2012E EPS forecasts at RMB 0.20, 0.26 and 0.74 respectively.
Major events December review: LED to become popular in 2011 ? Last month, we visited NVC Lighting (2222 HK) and Neo-Neon (1686 HK). Currently, the cost of LED lighting, at around 5-7 times more than other devices, is still a major barrier to potential demand. However, according to NVC Lighting and Neo-Neon, the cost of LED lighting will decrease dramatically in the next 1-2 years. After a substantial reduction in price, LED technology will become popular, replacing traditional lighting devices, like incandescent and fluorescent lamps, because of its energy saving characteristics. We believe that LED may become popular in late 2011, benefiting NVC Lighting and Neo-Neon. ? We visited the microphone factory of AAC Acoustic (2018 HK) in December. We found that the company was very confident about demand for consumer electronics in 2011-2012. The company plans to add 60% more capacity to its microphone manufacturing business in 2011. The 2011 top-line growth guidance of AAC is about 30-40%. We are confident about consumer electronic sales in 2011-2012.
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Dec 2010 Industry Comments
January 2011 hot points: 3G user growth; peak season for online gaming companies ? In January, we recommend that investors pay special attention to 3G user growth. If 3G user additions accelerate, CU’s stock performance will improve. ? We will closely monitor the traffic of QQ on alexa.com, as an indicator of the potential peak season effect on Tencent, as students come back home for the winter holidays. ? Licenses for online gaming lottery services may be issued in 1Q11
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Dec 2010 Industry Comments
Appendix Table 1: SWS Research Key Assumptions Table (KAT) – Extract: Latest Forecasts 2010-12-30 Economic Indicators World Economic Indicators Global GDP Growth (%) Euro/USD (Year End) The Dollar Index (Year End) Domestic Economic Indicators Real GDP Growth: (%) Total Retail Sales Growth (%) CPI PPI 8.70 15.50 -0.70 -5.40 10.20 18.30 3.10 5.50 9.60 18.50 4.50 5.70 10.50 19.00 4.00 5.00 0.0 0.0 0.0 0.0 -0.90 1.41 80.60 4.60 1.40 81.20 4.30 1.50 81.50 4.50 1.65 81.00 0.0 0.0 0.0 2009F 2010F 2011F 2012F 2013F
Financial Indicators Net Profit Growth of HSCEI Index - Top-down (%) Net Profit Growth of HSCEI Index - Bottom-up (%) One-year Lending Rate (%) One-year Deposit Rate (%) RMB/USD (Year End)
2009F 21.70 28.40 2.25 5.31 6.80
2010F 30.00 30.60 2.75 5.81 6.60
2011F 20.00 21.70 3.50 6.56 6.30
2012F 19.00 19.00 3.75 6.81 6.00
2013F 0.0 0.0 0.0 0.0 0.0
Industrial Indicators Growth Rate of Per Capita Wage of Urban Workers (%) Growth Rate of Rural Per Capita Income (%)
2009F 13.50 8.50
2010F 15.00 11.00
2011F 15.40 13.00
2012F 18.60 15.50
2013F 0.0 0.0
Source: SWS Research
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Dec 2010 Industry Comments
Chart 11: Telecom Industry: Operating Revenue
Chart 12: Telecom industry: wireline, mobile & broadband service subscribers
Source:MIIT, SWS Research
Source:MIIT, SWS Research
Chart 13: Wireline business: China Telecom & China Unicom
Chart 14: Wireline broadband business: China Telecom & China Unicom
Source:MIIT, SWS Research
Source:MIIT, SWS Research
Chart 15: Mobile service subscribers: China Mobile, China Telecom & China Unicom
Chart 16: 3G subscribers: China Mobile, China Unicom & China Telecom
Source:Company Announcements, SWS Research
Source:Company Announcements, SWS Research
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Dec 2010 Industry Comments
Chart 17: 3G subscriber monthly additions: China Mobile & China Unicom
Chart 18: Internet users
Source:Compnay Announcements, SWS Research
Source:MIIT, SWS Research
Chart 19: The software industry: monthly revenue
Chart 20: The software industry: export & growth trend
Source:MIIT, SWS Research
Source:MIIT, SWS Research
Chart 21: The software industry: outsourcing & growth trend
Chart
22:
October
2010
Software
Industry
Revenue Structure
Source:MIIT, SWS Research
Source:Wind, SWS Research
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Aug 2010 Industry Comments
Chart 23: CATV subscribers
Chart 24: Seasonal market scale of outdoor LED advertising and growth trend
Source:Wind, SWS Research
Source:Wind, SWS Research
Chart 25: Seasonal market scale of online advertising and growth trends
Chart 26: The electronic manufacturing industry: sales revenue & delivery value of exports
Source:MIIT, SWS Research
Source:MIIT, SWS Research
Chart 27: The import & export of electronic products
Chart 28: The growth trend of electronic products exports
Source:MIIT, SWS Research
Source:SWS, Company
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Aug 2010 Industry Comments
Information Disclosure: The views expressed in this report accurately reflect the personal views of the analyst. The analyst declares that neither he/she nor his/her associate serves as an officer of nor has any financial interests in relation to the listed corporation reviewed by the analyst. None of the listed corporations reviewed or any third party has provided or agreed to provide any compensation or other benefits in connection with this report to any of the analyst, the Company or the group company(ies). A group company(ies) of the Company confirm that they, whether individually or as a group (i) are not involved in any market making activities for any of the listed corporation reviewed; or (ii) do not have any individual employed by or associated with any group company(ies) of the Company serving as an officer of any of the listed corporation reviewed; or (iii) do not have any financial interest in relation to the listed corporation reviewed or (iv) do not, presently or within the last 12 months, have any investment banking relationship with the listed corporation reviewed. Undertakings of the Analyst Jim Tang, Ikon Lan: Equity Analyst I am conferred the Professional Quality of Securities Investment Consulting Industry by the Securities Association of China or have equivalent professional competence. I issue this report independently and objectively with due diligence. This report distinctly and accurately reflects my research opinions. I have never been, am not, and will not be compensated directly or indirectly in any form for the specific recommendations or opinions herein. Information Disclosure with respect to the Company The Company fulfills its duty of disclosure within its sphere of knowledge. The clients may contact compliance@swsresearch.com for the relevant disclosure materials. Introduction of Share Investment Rating Security Investment Rating: When measuring the difference between the markup of the security and that of the market’s benchmark within six months after the release of this report, we define the terms as follows: Buy: with a markup more than 20% better than that of the market; Outperform:With a markup 5% to 20% better than that of the market; Neutral: with a markup less than 5% better or worse than that of the market; Underperform: with a markup more than 5% worse than that of the market. Industry Investment Rating: When measuring the difference between the markup of the industry index and that of the market’s benchmark within six months after the release of the report, we define the terms as follows: Overweight:Industry performs better than that of the whole market; Neutral: Industry performs about the same as that of the whole market; Underweight:Industry performs worse than that of the whole market. We would like to remind you that different security research institutions adopt different rating terminologies and rating standards. We adopt the relative rating method to recommend the relative weightings of investment. The clients’ decisions to buy or sell securities shall be based on their actual situation, such as their portfolio structures and other necessary factors. The clients shall read through the whole report so as to obtain the complete opinions and information and shall not rely solely on the investment ratings to reach a conclusion. The Company employs its own industry classification system. The industry classification is available at our sales personnel if you are interested. Triple-C Index is the benchmark employed in this report.
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Strong overseas demand confirms Telecom Renaissance

发布机构:申银万国
报告类型:外行报告 发布日期:2010/12/30
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Industry Industry Research
TMT December 30,2010
Strong overseas demand confirms Telecom Renaissance —— 2010 December TMT strategy report
Neutral Unchanged Related Research:
Investment highlights ? Overview: Overseas demand for Chinese telecom equipment is recovering. We are bullish on the prospects of ZTE and Comba Telecom in 2011. CU is likely to achieve comfortable 3G user growth in 1Q11. Therefore we maintain our Outperform rating on CU. ? ?
“Buy China Wireless, Tencent and China Mobile in the interim-result season”-August 10,2010 "Handset sector— New opportunities arise as 3G market heats up " July 2,2010 "China Wireless (2369.HK)—Interim result preview: we expect shining interim results from China Wireless" Aug 4,2010
Recovering Chinese telecom exports. We believe that this trend will continue in 2011. When 3G user growth picks up in 2011, so will demand for network
optimization. Comba Telecom, as the leading network optimization solution provider, would benefit from this. ? ? ? 3G user growth will accelerate in 1Q11 as CU offers aggressive handset subsidies. Hot points for Dec-Jan:1) 3G user growth; 2) CU’s will offer the iPad December review: 1) We issued our in-depth report on CU asserting our view that CU’s performance in 4Q10 will be poor. CU’s revenue momentum will be very encouraging in 2011, therefore we maintain our Outperform rating and TP of HK$ 14.30. 2) We visited NVC Lighting (2222. HK) and Neo-Neon (1868.HK) to explore opportunities in the LED industry. We believe that the demand for LED will increase rapidly. NVC and Neo-Neon are well positioned to meet the increasing demand for LED products. 3) We visited AAC Acoustic. We believe that consumer electronics will enjoy strong growth in 2011. As the leading supplier of sound models, AAC Acoustic may benefit from rising demand for consumer electronics.
Jim Tang Equity Analyst tangmj@swsresearch.com
Ikon Lan Equity Analyst lankun@swsresearch.com
Contact Ashley Sheng (8621)23297818×7274 shengzw@swsresearch.com
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The company or its affiliate may have equities of the listed corporation reviewed authorized by law. The company may also provide investment banking and consulting service to the listed corporation. The Company fulfills its duty of disclosure within its sphere of knowledge. The clients may contact compliance@swsresearch.com for the relevant disclosure materials. The clients shall have a comprehensive understanding of the disclosure in the last page.
Dec 2010 Industry Comments
投资摘要: ? 综述:海外市场对中国通讯设备的需求正恢复。我们看好中兴通讯和京信 通信 2011 年的表现。2011 年一季度,中国联通 3G 用户的增长有望达到 令人满意的水平。因此,我们维持对中国联通的增持评级。 ? 中国通信设备的出口正得到不断复苏。我们认为这个增长趋势会在 2011 得到延续。 ? 当 3G 用户数的增长在 2011 年得到加速后, 网络优化的需求也会相应地增 加。作为领先的网络优化解决方案供应商,京信通信将为因此而受益。 ? 中国联通积极的手机补贴将会加速其 3G 用户数的增长。 ? 12 月- 1 月热点:1)3G 用户的增长;2)中国联通将出售 iPad ? 2010 年 12 月回顾: 1) 我们发布了中国联通的深度报告, 认为中国联通今年四季度的业绩较弱。 然而,收入增长势头在 2011 年将会非常振奋人心,因此我们维持对其增持 的评级,目标价为 14.30 港币。 2)我们拜访了雷士照明(2222.HK)和真明丽(1868.HK) ,以期挖掘 LED 行业的投资机会。我们认为,LED 产品需求在未来会有较快的增长。雷士 照明和真明丽能完全应对 LED 产品需求的增加。 3)我们拜访了瑞声声学。认为,消费电子产品需求在 2011 年会有强劲的 增长。作为声学行业的领先者,瑞声声学将受益于消费电子产品需求的增 长。
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Dec 2010 Industry Comments
Investment case Case 1: Recovering Chinese telecom exports Valuation and TP: In light of rising overseas demand and the potential demand for network optimization, we recommend ZTE (763 HK) and Comba Telecom (2342 HK). We maintain our Outperform rating on both of these stocks with target prices of HK$42.6 and HK$11.5 respectively. How we differ from consensus: The market hasn’t fully realized the improvements in overseas demand and ZTE’s earnings ability. From observing ZTE’s current valuation, we believe that the strong growth prospects and earnings ability of ZTE in 2011 have also not been fully realized by the market, yet successive financial indicators support our optimism. We therefore maintain our Outperform rating on ZTE (763 HK). As ZTE’s supplier, Comba Telecom would benefit from ZTE’s strong top-line growth in 2011. We maintain our Outperform rating on Comba Telecom, with a TP of HK$11.5. Catalyst: 1) Improved 1Q11 results;2) Increased demand for Chinese telecom exports
Case 2: CU’s 3G user growth is likely to accelerate in 1Q11 Valuation and TP: We maintain our Outperform rating on CU with a TP of HK$ 14.30. We believe that CU’s 3G business will breakeven in 2011. In light of CU’s aggressive handset subsidies, we lower our 2010-2012 EPS forecasts from RMB 0.20, 0.44 and 0.80 to RMB 0.20, 0.26 and 0.74 respectively. How we differ from the market: The market is concerned about 2011 3G growth and how CU’s aggressive subsidies could damage top-line and bottom-line growth. We believe that 3G user growth will fall short of market expectations in 2010. However, it is highly likely that 3G user growth will accelerate as operators optimize their 3G network coverage, lower 3G service fees and improve their handset ranges. We estimate that there will be 140 million 3G subscribers by the end of 2011. With the possibility of explosive growth in 3G users in 2011, we are optimistic about CU’s top-line growth. We see some short-term risks from CU’s aggressive handset subsidy policy to its bottom-line. With an increased number of 3G users, the increase in ARPU would cover the handset subsidies in the long-term. When CU delivers improved operating data for its 3G business, we estimate that the quarterly earnings of CU will be RMB 0.02, 0.05, 0.08 and 0.11. This would convince the market of the profitability of CU’s 3G business. Catalyst: 1) Acceleration of 3G subscriber growth in 1Q11; 2) Improved 1Q11, 2H11 results
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Dec 2010 Industry Comments
Table of Content Top Story: Recovery of overseas demand for Chinese telecom equipment ................................................................................................. 5 Chinese telecom exports hit bottom in October 2010........................... 5 ZTE’s Indian export revenues will double in 2011 ................................................. 6 RMB150B 3G investment in 2011 ...................................................................... 6 Comba Telecom: safe valuation and rebounding demand ...................................... 7
CU will achieve strong sales momentum in 2011.................................. 7 Aggressive handset subsidies will accelerate 3G user growth in 2011 ...................... 7 Lower 3G fees----another way to boost 3G users ................................................. 8 Impressive quarterly earnings momentum in 2011 ................................................ 9 Outperform rating for CU with a TP of HK$ 14.30 ................................................. 9
Major events ............................................................................................. 9 December review: LED to become popular in 2011............................... 9 January 2011 hot points: 3G user growth; peak season for online gaming companies................................................................................. 10 Appendix ....................................................................................................11
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Dec 2010 Industry Comments
Chart & Table Chart 1: Poor performance of telecom equipment manufacturers in 2010 .............5 Chart 2: Global telecom capex will increase by 7.4% in 2011...................................5 Chart 3: Global wireless network investments continued to improve in 2010........6 Chart 4: Telecom equipment exports bottomed out in October 2010 ......................6 Chart 5: China Mobile’s 2G utilization surged by 15% in the first half of 2010 .......7 Chart 6: Growth of handset subsidies........................................................................8 Chart 7: Low 2G ARPU implies that current 2G users might not be able to afford high 3G fees, 3G fees will continue to decrease........................................................8 Chart 8: We have factored in a decreasing 3G ARPU for the next three years .......8 Chart 9: Estimates of CU’s 3G users ..........................................................................9 Chart 10: ARPU estimates of CU’s 3G users..............................................................9 Chart 11: Telecom Industry: Operating Revenue.......................................................1 Chart 12: Telecom industry: wireline, mobile & broadband service subscribers ...1 Chart 13: Wireline business: China Telecom & China Unicom.................................1 Chart 14: Wireline broadband business: China Telecom & China Unicom .............1 Chart 15: Mobile service subscribers: China Mobile, China Telecom & China Unicom ..........................................................................................................................1 Chart 16: 3G subscribers: China Mobile, China Unicom & China Telecom.............1 Chart 17: 3G subscriber monthly additions: China Mobile & China Unicom ..........2 Chart 18: Internet users ...............................................................................................2 Chart 19: The software industry: monthly revenue ...................................................2 Chart 20: The software industry: export & growth trend ..........................................2 Chart 21: The software industry: outsourcing & growth trend.................................2 Chart 22: October 2010 Software Industry Revenue Structure ................................2 Chart 23: CATV subscribers ........................................................................................3 Chart 24: Seasonal market scale of outdoor LED advertising and growth trend ...3 Chart 25: Seasonal market scale of online advertising and growth trends ............3 Chart 26: The electronic manufacturing industry: sales revenue & delivery value of exports ......................................................................................................................3 Chart 27: The import & export of electronic products...............................................3 Chart 28: The growth trend of electronic products exports .....................................3
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Dec 2010 Industry Comments
Top Story: Recovery of overseas demand for Chinese telecom equipment Chinese telecom exports hit bottom in October 2010 2010 has been a poor year for telecom equipment manufacturers. The HSCEI decreased by 1.89% in 2010 till Dec 30. The stock prices of ZTE (763 HK) and MOBI Development (947 HK) fell 9.86% and 19.24% respectively. During this period, Comba delivered a satisfactory return of 14.49%, owing to a successful global expansion. This gloomy performance of other telecom operators is mainly put down to the Indian export ban and lagging domestic 3G investment. In late April, India announced that it would cease telecom equipment imports from China, because of security reasons. As a result of this, the stock prices of ZTE, Comba and MOBI plummeted in May-August. In August, ZTE and Huawei agreed to comply with new Indian security laws leading to a rebound in the stock prices of the three companies. Based on these events, we deduce that the stock prices of telecom equipment manufacturers are highly correlated with overseas demand for telecom equipment.
Chart 1: Poor performance of telecom equipment manufacturers in 2010
Chart 2: Global telecom capex will increase by 7.4% in 2011
Source: Bloomberg , SWS Research
Source:Analysys Mason, SWS Research
We are highly optimistic about overseas demand for telecom equipment in 2011. The core assumptions behind this forecast are rising telecom infrastructure construction in emerging markets and network upgrades in developed markets. According to Analysys Mason, global telecom capex will increase by 7.4% in 2011, higher than that of 2010. Global wireless network investments will continue to improve in 2011.
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Dec 2010 Industry Comments
Chart 3: Global wireless network investments continued to improve in 2010
Chart 4: Telecom equipment exports bottomed out in October 2010 40000 35000 30000 25000 20000 10% 15000 10000 5000 0 2008-07 2008-09 2008-11 2009-01 2009-03 2009-05 2009-07 2009-09 2009-11 2010-01 2010-03 2010-05 2010-07 2010-09 2010-11 0% -10% -20% -30% mn USD 60% 50% 40% 30% 20%
Computer and Telecom Tech Exports Computer and Telecom Tech Exports% YoY
Source:Swedbank Research , SWS Research
Source:Swedbank Research , SWS Research
The recovery in Chinese computer and telecom equipment exports bottomed in October 2010, right after ZTE and Huawei’s compromise with Indian authorities. After the Indian ban on Chinese telecom equipment imports in late April, the YoY growth rate of computer and telecom equipment exports had decreased from 47% in May to 12% in October. A rebound occurred from 12% growth YoY in October to 24% YoY growth in November after ZTE and Huawei complied with Indian safety requirements in 3Q10.
ZTE’s Indian export revenues will double in 2011 ZTE’s business faced large challenges in India in 2Q10. Since ZTE’s compliance with Indian safety standards, ZTE’s inventory has increased by 20% QoQ to RMB 13.66B in 3Q10, implying increasing orders from India. On December 8 2010, ZTE announced that they had signed a UMTS construction contract amounting to USD 85M with Aircel, a top 10 telecom operator in India. This order is a clear sign that ZTE’s Indian business is recovering fast. Before 2010, ZTE’s revenues from India were normally RMB 4-5B. In 1Q10-3Q10, ZTE’s Indian revenues were RMB 2B. We believe that ZTE’s Indian revenues are very likely to double in 2011, because of this low base.
RMB150B 3G investment in 2011 Recently, the MIIT announced that it would invest RMB 400B in the mainland telecom industry, 80% of which will be spent on 3G and broadband construction. 3G investment in 2010 definitely disappointed the market. We estimate that 2010 3G investment amounted to only ~RMB 90B. In 2011, 3G investment in China will be ~RMB 160B, ~78% higher than 2010. Domestic 3G capex will improve in 2011.
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Dec 2010 Industry Comments
In December 2010 there were various indicators that supported our belief that both domestic and overseas demand for Chinese telecom equipment would rebound in 2011. Therefore, we believe that telecom equipment manufacturers will prosper in 2011.
Comba Telecom: safe valuation and rebounding demand CM’s 2G utilization rate has been much higher since the introduction of 3G. As a result of the increasing data usage of 3G users, network quality has been compromised. The CEO of CM also acknowledged that its 2G network is under pressure and that CM will improve its network quality in 2011. 3G users are set to triple in 2011, which will place further pressure on CM’s network quality. As the leading network optimization solutions provider, Comba Telecom can take advantage of this. For Comba, we make 2010/11/12 EPS forecasts of HK$0.64, 0.83, and 1.60, respectively; with a 10x11P/E.
Chart 5: China Mobile’s 2G utilization surged by 15% in the first half of 2010
Source: Company reports, SWS Research
CU will achieve strong sales momentum in 2011 Aggressive handset subsidies will accelerate 3G user growth in 2011 In 2011, we are likely to see CU’s 3G user growth accelerate, which drive the performance of CU’s stock price. The reasons why we believe that CU’s 3G users will increase are handset-upgrading demands, lower 3G fees and CU’s aggressive subsidies. We have analyzed the demand for handset upgrades in our last monthly report. CU has taken an aggressive approach to handset subsidies since 3Q10. In 1H10, CU spent RMB 1.2B on handset subsidies. In 3Q10, RMB 1.8B was spent. In 4Q10, we estimate that CU will spend RMB 3B
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Dec 2010 Industry Comments
on handset subsidies. We believe that CU’s aggressive handset subsidies will continue in 2011, triggering strong 3G user growth.
Chart 6: Growth of handset subsidies
Source: SWS Research
Lower 3G fees----another way to boost 3G users CU has recently initiated a new monthly 3G package, priced at RMB 46 per month. This package is aimed at reducing the price barriers for consumers wishing to use 3G. Normally, the 2G APRU of mainland telecom operators is between RMB 35-60. Previously, CU’s lowest monthly 3G charge was RMB68. Lowering 3G fees is a necessary step for telcos to attract 3G users. We believe that this trend will continue. In our financial model, we expect CU’s 3G ARPU to be RMB 120.45, 102.38 and 81.9 in 2010E-2012E, respectively.
Chart 7: Low 2G ARPU implies that current 2G users might not be able to afford high 3G fees, 3G fees will continue to decrease
Chart 8: We have factored in a decreasing 3G ARPU for the next three years
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Dec 2010 Industry Comments
Source: Nielson , SWS Research
Source:Nielson, SWS Research
Impressive quarterly earnings momentum in 2011 To quantify the effect of 3G on CU’s bottom-line, we factored-in the below assumptions into our financial model. Under these assumptions, we forecast quarterly EPS in 2011 of RMB 0.02, 0.05, 0.08 and 0.12 respectively. For CU, we forecast a 2011 EPS of RMB 0.26. However, we’ll see a strong rebound of CU’s bottom-line in 2012. According to our financial model, the 2012 EPS of CU will be RMB 0.74, representing a 284% YoY growth. Chart 9: Estimates of CU’s 3G users Chart 10: ARPU estimates of CU’s 3G users
Source:SWS Research
Source:SWS Research
Outperform rating for CU with a TP of HK$ 14.30 With strong 3G user growth and the improving earnings ability of CU’s 3G business, we maintain our Outperform rating and a TP of HK$ 14.30. We also maintain our 2010E-2012E EPS forecasts at RMB 0.20, 0.26 and 0.74 respectively.
Major events December review: LED to become popular in 2011 ? Last month, we visited NVC Lighting (2222 HK) and Neo-Neon (1686 HK). Currently, the cost of LED lighting, at around 5-7 times more than other devices, is still a major barrier to potential demand. However, according to NVC Lighting and Neo-Neon, the cost of LED lighting will decrease dramatically in the next 1-2 years. After a substantial reduction in price, LED technology will become popular, replacing traditional lighting devices, like incandescent and fluorescent lamps, because of its energy saving characteristics. We believe that LED may become popular in late 2011, benefiting NVC Lighting and Neo-Neon. ? We visited the microphone factory of AAC Acoustic (2018 HK) in December. We found that the company was very confident about demand for consumer electronics in 2011-2012. The company plans to add 60% more capacity to its microphone manufacturing business in 2011. The 2011 top-line growth guidance of AAC is about 30-40%. We are confident about consumer electronic sales in 2011-2012.
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Dec 2010 Industry Comments
January 2011 hot points: 3G user growth; peak season for online gaming companies ? In January, we recommend that investors pay special attention to 3G user growth. If 3G user additions accelerate, CU’s stock performance will improve. ? We will closely monitor the traffic of QQ on alexa.com, as an indicator of the potential peak season effect on Tencent, as students come back home for the winter holidays. ? Licenses for online gaming lottery services may be issued in 1Q11
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Dec 2010 Industry Comments
Appendix Table 1: SWS Research Key Assumptions Table (KAT) – Extract: Latest Forecasts 2010-12-30 Economic Indicators World Economic Indicators Global GDP Growth (%) Euro/USD (Year End) The Dollar Index (Year End) Domestic Economic Indicators Real GDP Growth: (%) Total Retail Sales Growth (%) CPI PPI 8.70 15.50 -0.70 -5.40 10.20 18.30 3.10 5.50 9.60 18.50 4.50 5.70 10.50 19.00 4.00 5.00 0.0 0.0 0.0 0.0 -0.90 1.41 80.60 4.60 1.40 81.20 4.30 1.50 81.50 4.50 1.65 81.00 0.0 0.0 0.0 2009F 2010F 2011F 2012F 2013F
Financial Indicators Net Profit Growth of HSCEI Index - Top-down (%) Net Profit Growth of HSCEI Index - Bottom-up (%) One-year Lending Rate (%) One-year Deposit Rate (%) RMB/USD (Year End)
2009F 21.70 28.40 2.25 5.31 6.80
2010F 30.00 30.60 2.75 5.81 6.60
2011F 20.00 21.70 3.50 6.56 6.30
2012F 19.00 19.00 3.75 6.81 6.00
2013F 0.0 0.0 0.0 0.0 0.0
Industrial Indicators Growth Rate of Per Capita Wage of Urban Workers (%) Growth Rate of Rural Per Capita Income (%)
2009F 13.50 8.50
2010F 15.00 11.00
2011F 15.40 13.00
2012F 18.60 15.50
2013F 0.0 0.0
Source: SWS Research
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Dec 2010 Industry Comments
Chart 11: Telecom Industry: Operating Revenue
Chart 12: Telecom industry: wireline, mobile & broadband service subscribers
Source:MIIT, SWS Research
Source:MIIT, SWS Research
Chart 13: Wireline business: China Telecom & China Unicom
Chart 14: Wireline broadband business: China Telecom & China Unicom
Source:MIIT, SWS Research
Source:MIIT, SWS Research
Chart 15: Mobile service subscribers: China Mobile, China Telecom & China Unicom
Chart 16: 3G subscribers: China Mobile, China Unicom & China Telecom
Source:Company Announcements, SWS Research
Source:Company Announcements, SWS Research
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Dec 2010 Industry Comments
Chart 17: 3G subscriber monthly additions: China Mobile & China Unicom
Chart 18: Internet users
Source:Compnay Announcements, SWS Research
Source:MIIT, SWS Research
Chart 19: The software industry: monthly revenue
Chart 20: The software industry: export & growth trend
Source:MIIT, SWS Research
Source:MIIT, SWS Research
Chart 21: The software industry: outsourcing & growth trend
Chart
22:
October
2010
Software
Industry
Revenue Structure
Source:MIIT, SWS Research
Source:Wind, SWS Research
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Aug 2010 Industry Comments
Chart 23: CATV subscribers
Chart 24: Seasonal market scale of outdoor LED advertising and growth trend
Source:Wind, SWS Research
Source:Wind, SWS Research
Chart 25: Seasonal market scale of online advertising and growth trends
Chart 26: The electronic manufacturing industry: sales revenue & delivery value of exports
Source:MIIT, SWS Research
Source:MIIT, SWS Research
Chart 27: The import & export of electronic products
Chart 28: The growth trend of electronic products exports
Source:MIIT, SWS Research
Source:SWS, Company
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Aug 2010 Industry Comments
Information Disclosure: The views expressed in this report accurately reflect the personal views of the analyst. The analyst declares that neither he/she nor his/her associate serves as an officer of nor has any financial interests in relation to the listed corporation reviewed by the analyst. None of the listed corporations reviewed or any third party has provided or agreed to provide any compensation or other benefits in connection with this report to any of the analyst, the Company or the group company(ies). A group company(ies) of the Company confirm that they, whether individually or as a group (i) are not involved in any market making activities for any of the listed corporation reviewed; or (ii) do not have any individual employed by or associated with any group company(ies) of the Company serving as an officer of any of the listed corporation reviewed; or (iii) do not have any financial interest in relation to the listed corporation reviewed or (iv) do not, presently or within the last 12 months, have any investment banking relationship with the listed corporation reviewed. Undertakings of the Analyst Jim Tang, Ikon Lan: Equity Analyst I am conferred the Professional Quality of Securities Investment Consulting Industry by the Securities Association of China or have equivalent professional competence. I issue this report independently and objectively with due diligence. This report distinctly and accurately reflects my research opinions. I have never been, am not, and will not be compensated directly or indirectly in any form for the specific recommendations or opinions herein. Information Disclosure with respect to the Company The Company fulfills its duty of disclosure within its sphere of knowledge. The clients may contact compliance@swsresearch.com for the relevant disclosure materials. Introduction of Share Investment Rating Security Investment Rating: When measuring the difference between the markup of the security and that of the market’s benchmark within six months after the release of this report, we define the terms as follows: Buy: with a markup more than 20% better than that of the market; Outperform:With a markup 5% to 20% better than that of the market; Neutral: with a markup less than 5% better or worse than that of the market; Underperform: with a markup more than 5% worse than that of the market. Industry Investment Rating: When measuring the difference between the markup of the industry index and that of the market’s benchmark within six months after the release of the report, we define the terms as follows: Overweight:Industry performs better than that of the whole market; Neutral: Industry performs about the same as that of the whole market; Underweight:Industry performs worse than that of the whole market. We would like to remind you that different security research institutions adopt different rating terminologies and rating standards. We adopt the relative rating method to recommend the relative weightings of investment. The clients’ decisions to buy or sell securities shall be based on their actual situation, such as their portfolio structures and other necessary factors. The clients shall read through the whole report so as to obtain the complete opinions and information and shall not rely solely on the investment ratings to reach a conclusion. The Company employs its own industry classification system. The industry classification is available at our sales personnel if you are interested. Triple-C Index is the benchmark employed in this report.
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